Dipping GST collections: States face losing revenue cover

The drastic fall in Goods and Services Tax (GST) collections could not only add to the Centre’s fiscal woes, but also deprive state governments of their assured compensation for revenue shortfall. Going by the collections until September, the compensation cess kitty would fall short by Rs 1,08,000 crore over FY20 (about Rs 9,000 crore/month), denting states’ coffers.A more realistic estimate of the shortfall, however, could be almost half of this amount, because towards the end of a fiscal, a big part of the floating integrated GST gets distributed and this could add roughly Rs 50,000-60,000 crore to the state GST (S-GST) kitty. At the end of September, more than Rs 1 lakh crore of IGST remained unallocated.What could be potentially worrying for the states is that the Centre is under no legal obligation to make up for the shortfall by dipping into the Consolidated Fund of India if the proceeds from various cesses meant for bridging the states’ GST revenue deficit turn out to be insufficient.The states are constitutionally guaranteed a 14% y-o-y growth in GST revenue over the FY16 base, which means that the combined average monthly GST revenue of all states must be Rs 55,900 crore this fiscal. As against this, as the chart shows, the state GST (S-GST) revenue in the first half of this fiscal was just Rs 38,700 crore.Says Sushil Modi, deputy chief minister and finance minister of Bihar, “Legally, it’s not clear where the money would come from to compensate states for the shortfall if the designated fund is not sufficient. The GST Council will have to discuss and formulate a solution in the coming months.”At the 37th GST Council meet in Goa last month, the 15th Finance Commission had raised the issue that protected revenue growth for states was too high, given the economic slowdown and subdued actual tax receipts. The commission had also suggested that states could agree to lower assured growth in lieu of an extension of the period for compensation. It also pointed out that lower central revenue eventually means lower devolution to states. Sources, however, said that while the states batted for a three-year extension of the compensation period to 2025, they rejected the suggestion on lower guaranteed growth. As per rules, any surplus in the cess kitty gets disbursed to the Centre and states on a 50:50 basis. The last two years saw a surplus in the kitty.

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